Good day, everyone and welcome to the Toll Brothers' Fourth Quarter 2006 Earnings Release Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only-mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

I will now turn the call over to Mr. Robert Toll, Chairman and Chief Executive Officer. Mr. Toll, please go ahead, sir.

Before I begin, I ask you to read the statement of forward-looking information in today's release and on our website. I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, weather, and other factors beyond our control that could and will significantly affect future results. Those listening on the web can e-mail questions to rtoll@tollbrothersinc.com. We'll try to answer as many as possible.

Fiscal year '06's fourth quarter net income was $173.8 million or $1.07 million per share diluted. In '06 fourth quarter net income included pre-tax, write-downs of $115 million or $0.42 per share diluted after tax versus '05's $1.4 million or less than $0.01 per share after tax. Fiscal year '06's fourth quarter earnings per share including write-downs declined 42% versus '05. Excluding write-downs, earnings on a per share basis were down 19%.

Fiscal year '06 full year net income was $687.2 million or $4.17 per share. Fiscal year '06's net income included pre-tax write-downs of $152 million or $0.56 per share fully diluted after tax. '05 full year pre-tax write-downs were $5.1 million or $0.02 per share after tax.

Fiscal year '06 earnings per share including write-downs declined 13% versus '05. Excluding write-downs, earnings on a per share basis were down 1% versus '05. '06 write-downs were about 2.7% of our fiscal year-end '06 stockholders equity. In fiscal year-end '06, stockholders equity increased 24% over fiscal year-end '05 and returned on fiscal year '06 beginning equity was 25%.

'06's full-year total revenues were a record $6.12 billion, up 6% over '05. Full-year signed contracts were $4.46 billion, down 38% versus '05. We continue to reevaluate and renegotiate our optioned land positions in response to current market conditions. We ended fiscal year '06 with approximately 74,000 lots under control compared to approximately 83,200 at fiscal year end '05. That is down 19% from a high of approximately 91,200 lots at fiscal year '06s second-quarter-end.

In tough times, our team produced our 15th consecutive year of record revenues and our second highest annual profits. These accomplishments are exceptional, considering the significant rise in cancellations and are a tribute to our associate's commitment and hard work.

15 months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic although erratic from week-to-week, seem to be dancing on the bottom or slightly above that. For us the northern Virginia, Washington DC market was the first to slowdown. It now seems to have stabilized, although at levels much lower than those we have enjoyed over the past few years. The Maryland DC market also seems to have stabilized, though at higher levels than northern Virginia as that market never went down as much as northern Virginia.

As we previously announced, this quarter's results were negatively impacted by a higher than normal 585 cancellations. With these cancellations creating unintended specs, we could face increasing margin pressure as we seek to move these homes. Right now it's a great time to buy a new luxury home. Builders are motivated to sell their specs and the fundamentals that typically lead our industry out of the slowdown are already in place. Interest rates are near historic lows, unemployment is near an all-time low and the stock market is setting records.

Experts project that population and household growth will continue. The increase in affluent households continues to outpace that of households in general, which bodes well for the luxury niche. We believe many buyers are waiting on the sidelines, with concerns about the direction of home prices as builders compete to move their specs. This is creating pent-up demand, since landowners and builders are not being aggressive taking lots through approvals right now. We could face a shortage of building sites in the early stages when the market turns.

We believe we are well-positioned for the market rebound. We have an experienced and seasoned management team, the industry's leading brand name, a portfolio of well-located properties and a broad array of product lines to attract urban and suburban luxury home buyers at all stages of their lives.

Last March, we increased our bank facility from $1.2 billion to $1.8 billion and extended it to March 2011. With approximately $1.1 billion unused and available under the facility plus over 600 million of cash in hand at fiscal year end '06, we are ready to take advantage of opportunities that may arise in this market. We've learned by managing through previous downturns dating back to 1968, the times of stress in our industry often produce unexpected opportunities. The last major downturn in the late 80's and early 90's provided a springboard for us to expand into North Virginia, the New York City suburbs, Southern Connecticut, Metro Los Angeles and San Francisco. In that period, we took the first major steps to becoming the national brand for luxury new homes.

In fiscal year '06, we marked our 20th anniversary as a public company and commenced our 40th year in the homebuilding business. We are proud of what our team has accomplished and the value we have created for our shareholders since going public in July '86. As the Monday is closed at 31.91 per share, $31.91 per share, our stock price has grown nearly 3000% from the day we offered it to the public. The S&P 500 has gone up about 485% over the same period. But we at Toll Brothers, who own approximately 30% of the company stock, are keenly aware of the 45% drop in our stock price since its peak in July '05. We assure our fellow shareholders that we will not be satisfied until our earnings, revenues, backlogs, and contracts are once again setting new records.

Now, it's time for Joel Rassman to do the numbers.

Joel Rassman

Thank you, Bob. Homebuilding revenues for the fourth quarter and full year were approximately $1.8 billion and $6.1 billion respectively as deliveries were at the bottom of our range, and the percentage of completion revenues were lower than our guidance.

Fourth quarter and full year land sales at $250,000 and $8.2 million respectively were also lower than guidance. Fourth quarter homebuilding cost of sales as a percentage of homebuilding revenues before interest and write-downs, at 69.5% was in line with our previous guidance. The fourth quarter interest expense at less than 2% of revenues was lower or better than guidance principally based on mix.

When we held our conference call on November 7, we were in the initial stages of our review for write-downs. The final determination of write-downs for the fourth quarter was a $115 million, which is $15 million higher than the top of our range. During this review, we determined that some communities needed larger than originally anticipated write-downs and we also identified additional communities and options which required write-downs. Write-downs relating to options were 60% of the total. The majority of all fourth quarter write-downs with options or communities owned were in California or Michigan.

Fourth quarter SG&A at a little under 8% of revenues was 60 basis points lower or better than our guidance, principally a result of lower payroll cost from staff reductions and lower bonus costs.

Joint venture income at $11.7 million was approximately equal to our previous guidance, while other income at $20.7 million exceeded our guidance by over $13 million due principally to retain deposits on cancellations and higher interest income. The tax rate was higher than guidance resulting principally from some additional state approvals. The number of shares we used to calculate earnings per share of $163.1 million for the quarter and $164.9 million for the year were both inline with guidance.

Projections are subject to many uncertainties and can change for many reasons. However, the current market conditions make it even more difficult to estimate revenues, costs or profits. Accordingly, please recognize this additional uncertainty and read carefully the forward-looking cautionary language in our release, our financial statements and on our website.

To assist you in preparing projections, this morning, we filed an 8-K and posted on our website detailed financial guidance by quarter. For fiscal 2007, our projected deliveries are expected to be between 6300 and 7300 homes at an average price between $660,000 and $670,000 and are based on our backlog at the end of the year, as well as anticipated signings to contracts which we expect to be able to deliver by the end of the year.

Because of uncertainties associated with the current market and its effect on land options in existing communities, we are including in our estimates $60 million of write-downs for the year. $10 million in each of the first and second quarters and $20 million in the third and fourth quarter, compared to the $16 million we have normally and previously included in our estimates.

This is not because we know that we will have these write-downs but rather as an estimate which reflects the uncertainties of current market conditions. Using this write-down number, we estimate that cost of sales before interest as a percentage of home building revenues will be approximately 77% to 77.9%. This increase in cost of sales reflects not only the estimate for write-offs but also as we previously discussed, the geographic mix shift to areas which have more competition and therefore lower margins. The effect of projected incentives especially those related to specs created by cancellations, and please remember that we do retentions as deposits of other income not as a cost of sales reduction. An increased overheads per home resulting from lower deliveries per community offset and thought by estimated cost reductions.

The Financial Accounting Standards Board has ratified the Emerging Issues Task Force recommendation affecting the use of percentage of completion of accounting subject to an additional common period. Accordingly, it appears likely that such change in accounting treatment will be approved.

Our guidance for 2007 assumes that we will use this new criteria and that only those buildings already accounted for using the percentage of completion method will continue to record revenues in that manner, and that all other buildings will be accounted for under the completed contract method. Accordingly, we estimate that the percentage of completion revenues in 2007 will be approximately $180 million to $200 million with gross margins of approximately 25%. Most of this revenue would have been recorded even under the completed contract method at these -- as these buildings are delivering homes during fiscal 2007. If we continue using the old criteria in fiscal 2007 that we had used in 2006, we estimate that another $275 million to $350 million of revenues would have been recorded above the $180 million to $200 million.

We project land sales at about $5 million down from last year's $8 million with gross margins of approximately 20% and that interest expenses will be approximately 2.1% of revenues. We estimate SG&A as a percentage of total revenues for 2006 -- for 2007 will be between 11.2% and 11.7% of total revenues as a result of reduction in anticipated revenues, the expenses associated with opening new communities, advertising expenditures to help promote sales. We estimate that other income of approximately $36 million, which is lower than the $50.6 million we had in 2006. This change is a result of fewer projected closings, making our mortgage entitled businesses less profitable, and less projected interest income offset in part by increased income from retained deposits and in asset sale.

Income from joint ventures is estimated at $22 million, significantly lower than the $48.4 million in 2006. As we have fewer units from the Tea Building, which is our Hoboken condo conversion joint venture, that we can expect to deliver by year-end, and because of lower than anticipated profits from other joint ventures particularly our sell joint ventures as we expect land sales to be spread over a longer periods of time, reflecting the slower markets. We expect that our tax rate will be approximately 39%. The result of all the above, is that net income is projected to be between $260 million and $340 million.

In order to assist you in preparing the quarterly 2007 models, I will highlight some quarterly information, I think you should consider. Information on the quarterly basis is subject to even more variances than annual information, and can include large swings which may be caused by items such as cancellations, weather approvals and contractor and material shortages.

We estimate that for the first quarter deliveries will be between 1600 and 1900 homes with an average price of between $670,000 and $680,000 those are increased guidance. We anticipate that deliveries for the second, third and fourth quarters will be between 1550 to 1750 units, 1600 to 1850 units, and 1550 units to 1800 units respectively.

We estimate that the average delivered price will be a little higher in the second quarter between $665,000 and $675,000 decreasing thereafter based on mix to between $655,000 and $665,000 in the third quarter and $650,000 to $660,000 in the fourth quarter. We would expect percentage of completion revenues of between $45 million and $50 million in the first quarter, $65 million and $70 million in the second quarter, $35 million and $40 million in the third quarter, and $35 million and $40 million in the fourth quarter. Based on the backlog in place, we expect that first quarter will have the lowest cost of sales at between 75% and 75.6% with cost of sales increasing each quarter thereafter, so that the third -- third and fourth quarters -- increasing thereafter, so that the third and fourth quarters will be 75.6 for the second to 76.5; 78 to 79.1 for the third; 79.5 to 80.6 for the fourth.

SG&A varies significantly quarter-to-quarter as we generally incur higher stock option expense in the first quarter, and more selling and advertising cost as a percentage of revenue in the first and second quarters than in the third and fourth quarters. As a result of reduced revenues, we expect selling cost as a percentage of revenues to increase. SG&A as a percentage of revenues is expected to be 11.4% to 11.9% in the first quarter, 11.2% to 11.7% in the second quarter, 11% to 11.5% in each of the third and fourth quarters. We have used an estimate of 164 million shares outstanding for the year-end for each quarter and at this point I'll turn it back to Bob.

Robert Toll

Thank you Joel, indeed. Rufus, do we have any questions?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And for our first question we go to Alex Barron with JMP Securities.

Alex Barron - JMP Securities

Yes. Thanks, guys. I was hoping you could elaborate a little bit on your comments about stabilization in DC. What you guys are seeing that leads you to that -- to feeling that things are stabilizing?

Robert Toll

Sure, this past weekend, for instance, we had quite a few communities sell to -- take non- reservation -- non-binding deposits. These are the deposits before we go into the real deposits within agreement of sale which are not returnable. We had taken two deposits per community and that would give us heart to believe that the market is responding better than it had in the past. And we saw this kind of pickup over the past month approximately. So, what appeared to us that whereas we had been, -- as I said in the monologue dancing along the bottom for couple of months, but recently last month it appears that we are now off the bottom a level above it and that heartens us. We also noticed approximately the same thing in Maryland. The Maryland never went down as deeply, it didn’t go into the ashcan as the Northern Virginia market probably because there was much less speculation. There was -- there were fewer lots available for constructions in the Maryland market, it was a tighter market. So, there we are now at a level which is pretty acceptable.

Florida picked up a little bit on the East Coast -- in East Gulf Coast in primary markets. And, I think I have it there -- I think it picked up in Jacksonville, one moment while I search for that -- no, not really, it didn’t really pickup in Jacksonville. I guess that's about it.

Alex Barron - JMP Securities

Okay, Thanks Bob.

Robert Toll

Welcome.

Alex Barron - JMP Securities

And, my second question -- sorry -- my second question was, can you give us some kind of breakdown of where do you guys took the impairments by region?

Joel Rassman

Joel, we've indicated that the two major regions which accounted for more than 70% of the total write-downs were in California and Michigan.

Alex Barron - JMP Securities

Okay, I got it. All right.

Robert Toll

Thank you.

Operator

And for our next question, we go to Margaret Whelan with UBS.

Margaret Whelan - UBS

Hi, guys.

Robert Toll

Hi Margaret.

Margaret Whelan - UBS

Trying to get a sense for the big jump in your cancellation rate relative to your buyers and your backlog; you have got a sense that you actually accelerated that. Did you go back and shake it out; I am trying to get a sense of whether or not people are going to come to the closing table?

Robert Toll

About 50% and 50% even worse. Yeah, we precipitated it by shaking the tree and saying all right, now common guys, come clear here, are you going to come to table or not? If not, let's get it over with it at this point in time. So, we gave charge to our management to proactively go do this and ask them to stop horsing around with would-be buyers who were indicating that they were probably not going to come to the closing table but they didn’t want to say they were out. Why should they? Their deposit is up at stake; the longer they can keep an option cooking, the more contraction we put into the home perhaps the better deal they can expect on a reconsideration; when we get to complete the home. And so we proactively said to management; go out, talk to these people and say, hey look, if you are not intending to come to the table, let's call it quits now and understand it. And so, I think that had impact and that’s why you had a jump in the number.

Margaret Whelan - UBS

And that’s why you think about half of that is attributable to that?

Robert Toll

I don’t know what the percentage is attributable to that. Anybody around here?

Margaret Whelan - UBS

What did you say was 50%?

Joel Rassman

About 20% of that was clearly a shakeout that we --

Robert Toll

I thought it was much higher.

Joel Rassman

Well, the 20% of that we did in the last couple of weeks.

Robert Toll

In the last couple of weeks.

Joel Rassman

That we just pushed people to find out, what's going on? So --

Margaret Whelan - UBS

Many of the 30%, were 20 of the total.

Joel Rassman

Of the total.

Margaret Whelan - UBS

Okay.

Robert Toll

Yeah. And I think it's higher, Margret.

Margaret Whelan - UBS

Okay. So, we might expect your con rates to get a little high every quarter from Jan?

Robert Toll

No. I don’t think so.

Margaret Whelan - UBS

And the second question I have -- I am trying to figure out what your free cash flow might be next year. How should we look at your inventory dollar relative to the con rate, relative to the delivery?

Robert Toll

Yeah. This is definitely for Joel.

Joel Rassman

Margaret, we based on the deals that we put on the contracts years ago, we still expect to buy more land than we will free up in inventory, of course capitalized from previous -- in previous acquisitions in the current year. So, from a land release standpoint, we will end up putting on our books more lots than we move.

Margaret Whelan - UBS

In terms of lots, but dollars?

Joel Rassman

Dollars will follow lots.

Margaret Whelan - UBS

Do you have a sense for the magnitude?

Joel Rassman

Probably $900 million of total additions is our current estimate.

Margaret Whelan - UBS

Okay, it will go from six to about seven. And then the last question I have is that, at our conference last month, everyone had a different view on how much -- how land prices might go up or not -- go up or go down next year. What is your sense for what you are seeing in the market right now? I know you are getting better terms but you are actually seeing prices on land come down?

Robert Toll

We are defiantly getting better terms especially from those people that we are already connected with through an option or who have become recently disconnected from some other builders who are in the market searching for someone to take their place. So, there is not a lot of buying going on out there. So, defiantly those who want to move property are giving better terms and better prices. I am aware of quite a few deals where the prices had dropped on average about 30% for the land.

Margaret Whelan - UBS

On land prices --

Robert Toll

Yes, for land. So, price is down 30% and whereas the terms of yesteryear that's taking all the way back about 9 or 10 months, where all cash at closing. Today, typical terms are of 3 or 4 year mortgage with release clauses similar to what was extinct in the mid-90's.

Margaret Whelan - UBS

Not mortgage, the terms are giving you on the debt to land, right?

Robert Toll

Yes.

Margaret Whelan - UBS

Okay. So if land price are down 30% and it looks like your --

Robert Toll

That's just the recent few deals, that well more than a few, 10 or so deals that we are acquainted with in the last couple of weeks.

Margaret Whelan - UBS

And relative to the decline in your order price, which is only about 5% from the peak, and it would seem that you'd have more impairments beyond the first half of '07, is that fair?

Robert Toll

We're going to have more impairment first half of '07, I hope.

Margaret Whelan - UBS

Beyond that.

Joel Rassman

I don’t think so. We -- if you look at the estimate that we gave you for 2007.

Margaret Whelan - UBS

Yes.

Joel Rassman

You'd assume that because we'd finish the evaluation process further into the next quarter than normal that the beginning part of the year would have less impairments and that if any surprises come, it will probably come more at the end of the year. But we don’t think that impairments will be anything like 2006 impairments were. And we don’t have an estimate that we can give you better than to tell you, you need to put a number in something to protect us, your selves.

Margaret Whelan - UBS

Okay.

Joel Rassman

Which is what we do.

Margaret Whelan - UBS

Okay. Thank you.

Robert Toll

You are welcome.

Operator

And we go next to Stephen Kim with Citigroup.

Stephen Kim - Citigroup

Thanks. I guess my question relates first to your average price points. I guess, I was wondering whether or not you anticipated that you might be able to see price increases revisit any of your communities some time in the next 12 months. Is that something that in any of your projections or planning, you have incorporated?

Robert Toll

We increased prices on approximately three community this past week; I can remember them specifically so. There are price increases but they are rare right now, as logically we are focused on just doing as much business as we can. If you are asking me to predict where we are going in the future, I would quote a well known analyst who said we continue to believe Home Builders stock will extend recent gains as they return to positive order trends by first quarter '07, drives a return to PE evaluations; we expect both the timing and steepness of this rally to take most industry observers by surprise. Now this would only come from price increases in the market. So, we believe that this analyst knows what he is talking about and if not from his mouth the god's ear.

Stephen Kim - Citigroup

Amen to that. The second question relates to land. One of the things that the market has generally been, I am taking about Wall Street has generally been focused on is the idea of that land is pretty much first-in and first-out. But my recollection is that when you come out of a downturn that often times you have the opportunity to step in and acquire land parcels from the stressed players and that land may a be little bit more ready to go sooner, maybe they -- half way through the community couldn’t make ends meet and so forth. And so you actually have an opportunity to acquire land that you don’t necessarily have to wait three or four years, five years in some case to actually build on.

Robert Toll

That is true, but I'm not certain that it will be in large enough quantity to make any difference this time around if we come out fairly soon.

Stephen Kim - Citigroup

Right.

Robert Toll

If we come out in the next six months on a definite basis, you will not have had a long enough down period to have ruined enough builders and developers to have a meaningful amount of ground hit the market. There is definitely some in the market already. I don’t want to go into it, but you know it and I know it that from some certain companies are struggling and some indeed that are in bankruptcy. But I don’t think that's a large enough amount yet to be a major factor with respect to the balance of supply and demand. So, I would expect that when the market returns, I agree, I wasn’t just kidding when I said, I agree with that analyst who expected it to return more rapidly, I do to you too. And if that occurs, I don’t think that you have enough land to have made a difference.

Stephen Kim - Citigroup

At least in terms --

Robert Toll

Land available.

Stephen Kim - Citigroup

At least in terms of land that you'll be buying at that time, but certainly you'll be benefited by the stuff that you still have in the harbor.

Robert Toll

Yes, I think that will true for us and for all the major builders that buy land as opposed to just in time.

Stephen Kim - Citigroup

Right. Great, thanks very much guys.

Robert Toll

You are welcome. Thank you.

Operator

We go next to Michael Rehaut with J.P Morgan.

Michael Rehaut - J.P. Morgan

Hi, good afternoon guys.

Robert Toll

Hi.

Michael Rehaut - J.P. Morgan

Couple of questions; first on the market commentary that you gave Bob, certainly interesting regarding DC and similar to what we saw last week. But you had mentioned in the press release that you maybe seeing the floor in some markets, and I was wondering if you had mentioned Florida possibly, although I guess you backed off that a little bit. Are any other markets --

Robert Toll

I mentioned Florida, I thought Jacksonville, Northern Florida might have gone up, but I said, I want to review, I will review it again just to make sure because it's in my mind. No, it's not true. No, that’s the primary market, hold on. Yes, actually Jacksonville this week it didn’t do so well. But in the last four weeks, Jacksonville has picked up a bit. So, I take back my correction of my gut. Always go with your guts, it's generally right. And, I would say the East Florida -- at East Florida the primary market, right.

Michael Rehaut - J.P. Morgan

Would you say California is still kind of deteriorating from your perspective at this point or given the write-offs that you've done there?

Robert Toll

No, I don’t think it's deteriorating any longer. It seems to -- if anything, it seems to be coming back a little bit. I am looking at stats from this week and the past eight weeks -- the past four weeks, and I see some surprises in that instead of taking zero or one non-binding reservation deposit per community, some communities are taking two and three, which is heartwarming. I wouldn’t say that it is definitive, it doesn’t prove anything, but it gives an appearance of a market coming back a little bit.

Michael Rehaut - J.P. Morgan

Where in California would that be?

Robert Toll

That was Northern California also known to you as the San Francisco and burb market.

Michael Rehaut - J.P. Morgan

Great, thanks. And one other question if I could, the quarterly --

Robert Toll

Excuse me, I have to correct. For us, San Jose is also, looking at it from an East Coast prospective, San Jose is also the San Francisco an environment market, even though it may be build separately by most of you. And we have had a pick up there recently.

Michael Rehaut - J.P. Morgan

I appreciate that. In terms of the quarterly progression that you outlined in the 8-K, we are looking at earnings kind of going from Q1 '07 to Q4 '07 been roughly cut in half. In terms of -- I know this might be pretty even more forward-looking, but based on how '07 goes, are we to think that whether or not that Q4 '07 might be the trough? If trends improve a little bit in -- over the next 12 months, would that then play out in fiscal '08?

Robert Toll

I'll let Joel talk to you but I must say, we are just not that good. You are looking -- our crystal ball definitely doesn't go out as you -- to answer the questions that you are asking.

Joel Rassman

I have more knowledge of the closure and settlements because they are coming out of the backlog and we envision that some of the other settlements will come out of speculative homes, which will have greater incentives settlement. So, we even provided for that in our estimates. We may be presently surprised and we may not.

Michael Rehaut - J.P. Morgan

Okay, fair enough. Thanks.

Robert Toll

You're welcome. I have with, Rufus, a bunch of questions here, I'll try and go through some of them from the Internet. This is from [Luchano Morelli]. How can you say you may face a shortage of buildable lots in the beginning of an upturn? You currently have ten years worth of lots available now.

I have said that I apologize, Luchano, I didn’t mean to. What I was discussing with Stephen Kim, and I believe that’s what this is in reference to, from the script it is -- to also is, I’m talking about those builders not us, who have relied on just-in-time supply method as opposed to those such as us, who have build up a pretty good backlog in buildable lots. So, you are right. Your question makes a statement and I think your statement is correct.

Thank you, Joel, from [Chris Gilde]. Now that it is obvious that the recent highs in new housing production i.e. '04 and '05 was largely or they were largely the result of speculative buying. What do you think is a more reasonable new housing build run rate for the next two to three years?

The answer is, I don't know. It would be ideal, if we could get the market to cook along at 2002, 2003 levels. But I think what will happen is when we reach 2002, 2003 levels of demand per community, speculation will once again come into the market, builders will raise the prices to suite the demand; as prices go up more demand will come in on a speculative basis, so on and so forth; then we will be taking about the next downturn instead of the next upturn. And as a follow up Chris says, what would you consider a reasonable gross margin percentage range over the long-term given that we will not likely benefit from the rapid rise in home prices, relative to land costs associated with those properties sold as was the case between '03 and '05.

I think that we can fairly take a guess at what we would consider a reasonable gross margin, Joel. What is a reasonable gross margin Joel, is the question.

Joel Rassman

We have reasonable gross margins in 2002 and 2003, was in [1990], I don't have that in front of me but I will look it up, while you get into the next question.

Robert Toll

Okay. Rufus, we will go back to questions from those you have.

Operator

And for our next question, we go to Timothy Jones with Wasserman and Associates.

Timothy Jones - Wasserman and Associates

Hello, Bobby

Robert Toll

Hi, Tim.

Timothy Jones - Wasserman and Associates

And also to Joel, I want to give you a congratulations to have the nerve, although as to put out an estimate and we know all the problems that are going on, but you have at least put it out and you are the only one that has.

Robert Toll

I wasn’t aware of that Tim, if you had told me I was the only one I wouldn’t do it.

Timothy Jones - Wasserman and Associates

No, no it was smart; it was smart, we all know what’s going on that --

Robert Toll

Okay, thank you, Tim.

Timothy Jones - Wasserman and Associates

That’s a compliment.

Robert Toll

Of course it is, and that’s why I said thank you.

Timothy Jones - Wasserman and Associates

Yes, okay, now a couple of things. One thing that worries me very big is the amount of land write-offs next year estimates and you, basically I think it was 150 million roughly for last year and going down to 60 million, I know what you were doing, you had to meet the number. Going down about to a one third of it was lost. Are those assumptions, maybe it's for Joel, in the option or the write-down of subdivisions?

Joel Rassman

I think, we tried to estimate both numbers, but we don’t know. If we knew we would have already taken in it Tim. It's kind of like an estimate to say, you would expect conditions not to be as good as they were in 2003 and 2004 and 2005. And so you need to have some idea. Historically, we have done under 10 million in write-downs for most years and I am hoping that --

Robert Toll

That's for the entire year.

Joel Rassman

I am hoping that when the conditions stabilize, we will be back to write-downs in those levels or less. But right now knowing that, it could get worse in individual markets, we have to be cautious and give you an understanding.

Robert Toll

It's prudent. We are just being prudent.

Timothy Jones - Wasserman and Associates

Could you allow me to follow that one up as my first question, I think it's critical.

Robert Toll

Yes, go ahead.

Timothy Jones - Wasserman and Associates

All right; I mean this is what's got people completely freaked out, on the grove, believe me. It's not everything else, it's this write-down situation. And I was talking to one of your competitors, actually not, because not in your price range, and they basically said that they had a write-off and it is in this quarter. So, they would write nothing off more than they did the last quarter, or very little, I mean less, like I said, under 10 million. Are you seeing this kind of same thing? I mean obviously you are coming to the end of year -- the fiscal year, so you have been audited. I mean the auditors, I would like to know how tough the audits have been and are you guys really, if anything, being overly conservative, and then not only for you, for the industry?

Joel Rassman

I can't answer for what other people do.

Timothy Jones - Wasserman and Associates

How about you?

Joel Rassman

I can answer for what we did. We did an incredibly exhaustive search all year long, and this is the best estimates we can, using reasonable sets of assumptions and the E&Y, who are our auditors, were involved in the process as we thought through, how we approached it and reviewed the numbers after we did our work. But as it’s the company's responsibility to do the initial go through and we look for write-offs every quarter.

Timothy Jones - Wasserman and Associates

Let me just ask this one because this is so important and that is as, would you think right now, are you comfortable that you could write-off less than $10 million in the next -- I am only going to put the next quarter because --

Robert Toll

No, I wouldn’t say that. I would say that what we've said already is our best guess, Tim.

Timothy Jones - Wasserman and Associates

All right, all right. I appreciate that. I am just going to leave you up on that because it was that important.

Robert Toll

Thank you very much.

Timothy Jones - Wasserman and Associates

Thank you.

Robert Toll

I appreciate it too.

Joel Rassman

To answer the previous question that was asked of margins, I would guess that if you look back historically 25%, 26% margins, were not -- are not unreasonable for Toll Brothers.

Robert Toll

Right, that was a question from a previous questioner. Rufus, I have some more Internet question, this one is from [Michael Steinberg]. With a glut of recently constructed used and investor homes. Only there weren’t investor homes if they were used, I guess they were -- unless they were rented, on the market. What differentiating features is Toll Brothers now including in its houses that did not exist a year or so ago?

It's actually a good question. What we have done, where we see that we have -- I choose not to use the word glut, thank you, Michael, but where we have more specs certainly than we ever expected or wanted, we have changed the appliance packages, so that when you walk into the home, you see a Bosch and Miele and Viking and Wolf, and Sub-Zero instead of the great stuff that we have been using. It is just as good, looks just as good, but just doesn't have that brand reorganization. So, that's an example of one of the things we are doing to move. And, we see Joel's recommending, go ahead Joel.

Joel Rassman

I think that if you look historically, a Toll Brothers home has maintained its value better than our competitors and has been easier to sell than our competitors' homes when we look back in the resell market. And, we think we build quality into our homes at all times and we hope we continue to do that.

Robert Toll

Michael then goes on to say, examples might include better hurricane protection in Florida and other things. Have we considered exceeding local building codes to differentiate? Yes, definitely we have and we do. So, thank you Michael, Rufus.

Operator

And for our next question, we go to Ken Zener with Merrill Lynch.

Ken Zener - Merrill Lynch

Good afternoon. I am wondering if you could expand on some of the data you put in your detailed estimates about the quarterly gross margins; because it's roughly 25% in the first quarter going down towards the fourth quarter, I realize the minority of that is attributable to your higher expected impairment rates. But why wouldn’t that be kind of the run rate or why wouldn’t that trend continue into '08 if we are seeing a core deterioration in the gross margin throughout the year. And these are really homes that you're pre-selling right now, right? They are not kind of (inaudible) homes.

Robert Toll

Good question. Joel?

Joel Rassman

As I think I said, but if I know let me make sure, its clearer. Because we don't know what deliveries will consist off in the third and fourth quarter particularly, because we believe it will have a higher number of homes that will be cancelled homes currently in our portfolio. We have built in additional incentives into those sales prices. So, if it turns out, we don’t need them then obviously the margins will be higher. But to be prudent, we have built those in.

Ken Zener - Merrill Lynch

What if things are stabilizing? I guess I don’t understand, it seems to be there's kind of two sides of that. If you think things are kind of stabilizing, why are you expecting increasing can rates?

Joel Rassman

I already have the cancellations, I now have to sell the homes.

Ken Zener - Merrill Lynch

Alright, okay. I guess the other question is, if you can explain a little bit more of the tower revenue. I know the miss in the third quarter was expected, was attributed to slower than expected construction and then the present completion for existing towers is slower going into '07. Is there something structural about that business that you didn’t expect or what was the miss coming from?

Joel Rassman

The accounting rules are changing and we anticipate that they will -- the new accounting rules or interpretations of the rules will be passed finally in the first-- our first or second quarter of 2007. Anticipating that change in accounting rules, although we could have waited to 2008 based on the current draft, we believe that we will adopt the use of the -- say, the newer criteria in 2007 which means some of the buildings which previously we had expected to account for using the percentage of completion method will be accounted for using the completed contract method and that’s why we reconciled effectively the impact of that change in criteria in the release.

Robert Toll

What Joel was saying is, and therefore because of early adoption of this method for calculating revenues and earnings would transfer to further out years the revenue and profits.

Ken Zener - Merrill Lynch

Are you (inaudible) expect the revenue from the fourth quarter and beyond '07?

Joel Rassman

No, no.

Ken Zener - Merrill Lynch

Because, down looking at the difference between the 31 million reported--

Joel Rassman

No, no. That was just -- we had two buildings that would have qualified. We had expected constructions who have qualified it in the fourth quarter, to have started to use the percentage of completion method. They didn’t get to that level of construction and now they will not ever get to that level of construction because under the new rules, we will not use it.

Ken Zener - Merrill Lynch

Okay. And I guess --

Robert Toll

So, it may be pushed out.

Ken Zener - Merrill Lynch

Right. And I guess, I -- just to go into that percentage of completion, I realized it's winding down, but -- as far as it impacts in '07. If you have a building, let's say like in, you were talking about (inaudible) which is getting towards completion --

Robert Toll

Exactly right, go ahead.

Ken Zener - Merrill Lynch

You probably, you said two weeks ago, two-thirds of the building was sold, but you probably accounted for more than two-thirds of the revenue. Am I mistaken given that is further long in the construction process and what type of liability does that (multiple speakers) in '07?

Robert Toll

No.

Joel Rassman

See, if we, for a percentage of completion revenues already recorded, it is only those units that we have under agreement of sale at the end of the year. For the units that we are projecting were including what we estimate we will sell during the year and probably deliver most of during the year, anyway so the building will be complete.

Ken Zener - Merrill Lynch

Thank you.

Robert Toll

You are welcome.

Operator

And we go next to Ivy Zelman with Credit Suisse.

Ivy Zelman - Credit Suisse

Good afternoon guys.

Robert Toll

Hi Ivy.

Ivy Zelman - Credit Suisse

Hi, Bob. I guess, I am kind of just curious Bob realizing it's the beginning of December which is typically a time where most builders we talk to are not willing to make a stance one way or the other around what the next several months or even the year will bring with respect to the outlook, especially because most builders are waiting till post Superball to make a stance based on how the spring selling season actually pans out and --

Robert Toll

That's right.

Ivy Zelman - Credit Suisse

Here you are Mr., it seems much more bullish talking about big pent-up demand and clearly you were surprised on the spiral downward and for the first time in 15 years your earnings are going to be down versus '06 and I think that you seem like a very I guess broken man last time you were on the call and here you are in Newland and I'm wondering which coolade you are drinking because I want some, because it is not what we are hearing from a lot of the other -- no one else in the industry is going to stick their neck out and a lot of people got burned and I'm wondering what did you see in the data because your numbers certainly don’t show it today and there is clearly a lot of risk that '07 won't bring the optimism to reality that you are seeing. So why put your neck out now Bob?

Robert Toll

Well, I don’t think I put my neck out. I think I have made a statement with regard to what I witnessed and I feel that I should make that statement because I witnessed it just as I made the statement many moon ago the things stink, and that we are getting chopped. But I don’t think I have made a statement with respect to the future. I don’t think that I have said that because of what we've witnessed that we are going to. I have just told the market, what we've witnessed so that they have that information to deal with.

Ivy Zelman - Credit Suisse

I am sorry. I thought --

Robert Toll

But I am not making--

Ivy Zelman - Credit Suisse

I thought I heard you say there was a lot of pent up demand and you are not being concerned.

Robert Toll

I am not making a prediction. There is not -- the pent up demand statement, I believe is that -- and I think it falls logically. Let's just take the DC market as an example; sales have fallen in the DC market. The DC market probably has an unemployment rate of about zero and come to think that I think every committee in Congress both houses is going to change its staff entirely not to mention that there is 40 or 50 odd people that I have not been in Washington and they will be soon, so, there is some minor demand coming from switch in politics. But with the unemployment in DC being near zero and with sales going down and with more people moving into the district, and with business going up in the district, it would logically, not definitely, but it would logically follow that demand is increasing in the DC market and yet sales are going -- were going down until we saw them recently coming off the bottom and dancing above the bottom. And therefore, we don’t think that it's illogical to assume that pent-up demand is building using that market as an example. That is all that we're saying.

Ivy Zelman - Credit Suisse

Okay. Well I think that’s clear. I guess Bob, I would wonder then, why you know to be a little bit more pointed if you were as optimistic as you seem and you know --

Robert Toll

Again, I didn’t mean to project optimism, I only meant to project what I had seen in the past.

Ivy Zelman - Credit Suisse

Okay. Well lets just say that you read a sell-side analyst's work that you said the stock, you think we'll continue to surge. Why only buy 1200 shares of your stock, why not buy a boatload of stock back if you really believed that stocks were headed north here?

Robert Toll

Well, I referred to somebody else's belief, but let us say that I believed, which I am unwilling to make a statement on; let us assume your proposition that I believe, which I don't necessarily, but let us assume that I do; your question of why wouldn't I buy stock; and the answer is I believe I can make more money with my powder cash on buying land and expanding the business than I believe I could make by buying my stock. Buying a stock is kind of a one time thing, I think.

Ivy Zelman - Credit Suisse

I think a lot of people if they ever follow you Bob and you are buying and selling personally, they have made a lot of money, and I'll leave it at that.

Robert Toll

Thank you, Ivy.

Ivy Zelman - Credit Suisse

Have a good day.

Robert Toll

Appreciate your question. Thank you.

Operator

And, we go next to Rob Stevenson with Morgan Stanley.

Rob Stevenson - Morgan Stanley

Good afternoon guys. Bob, you talked before about market that you saw improving. What are worst markets out there that you guys are operating in today?

Robert Toll

Worst markets, well there is a bunch of them. Recently, probably the worst -- well definitely the worst market is Reno. It's a market that we definitely missed the call on. I think that's the Las Vegas market in comparison to what it had been doing qualifies for a rotten market. And, most recently the Phoenix market, which did well for us long after everybody else -- pretty much everybody else had said poor things about, has turned sour for us. Kira just handed me a note reminding me of Detroit. Actually, we commented Kira this weekend, we sold five homes in Detroit, it's like -- that's fabulous. Who knows what's going on in Michigan and in Detroit, but we've been doing that for a couple of weeks now. Minnesota, it is definitely an F market for us. So, I hope that gives you some idea of where it stinks.

Rob Stevenson - Morgan Stanley

Okay, all right. And, how many land parcels did the 69 million of option write-offs during the quarter relate to?

Robert Toll

Joel, do you know that? Joe, Greg? Pages are being turned and we'll get back to you with an answer.

Rob Stevenson - Morgan Stanley

Okay. And then one other question on the write-downs; did all of the 115 pre-tax come at the cost of home sales line items or is it in any of the other line items as well?

Robert Toll

Joel?

Joel Rassman

The write-downs are in cost of sales.

Rob Stevenson - Morgan Stanley

Okay. Thanks guys.

Robert Toll

You're welcome. We'll get that answer to you shortly.

Operator

And, we go next to Stuart Hosansky with Vanguard.

Robert Toll

Thank you, Stewart.

Stuart Hosansky - Vanguard

Hi, how are you?

Robert Toll

Good, hi.

Stuart Hosansky - Vanguard

I actually have a very quick question for you. In the DC market where you indicated things looked as though they were improving a little bit, you had some non-binding contract.

Robert Toll

Right.

Stuart Hosansky - Vanguard

Can you talk at all about what you’ve done with pricing and incentive in that market, and the reason I am asking, because I have heard from other builders that, when they reduce prices enough, they see demand absolutely is there.

Robert Toll

That would figure, that’s what I try to explain when we went through the example using DC to Ivy, rate pent-up demand. We have not cut our prices nor increased our incentives, we believe as much as the other guys. When we have been handed spec inventory, we have put on extra incentives, but again not quite as much as the other guys. So, that answers your question?

Stuart Hosansky - Vanguard

Yes, and when you do, when there is other non-binding contracts signed --

Robert Toll

Well, actually it’s a -- let me clarify that.

Stuart Hosansky - Vanguard

Okay.

Robert Toll

You walk into the model, you and your wife express interest, you have taken out, you are have shown the loss, alright I want to buy an endeavor home in the Winners Circle phase, we like lot number three; we would say, well, give us $5,000 as a non-binding reservation for that lot, no obligation, we will return that 5000 if you change your mind off course and let us the draw the contract and then we call you in for the contract signing. At that point you would put down on a $700,000 home probably about $40,000 to $45,000; we would hope to pick up another 15 or 20,000 from you in down payment for options, at that point it's all binding. So, there is two stages; first that non-reservation, I mean the non-binding reservation stage, then there is the contract and then finally there is the sale or settlement.

Stuart Hosansky - Vanguard

And in those markets, or those communities where you were getting some of those -- some of that flow, how long had it been since you had gotten interest before?

Robert Toll

Well, we were talking about Washington DC market and I think I said in the last month, things picked up which was leave you with all those months prior to that where things were slower. What heartened us was we were seeing instead of one or none, we were seeing some two's and three's per community and that was pretty, pretty heartening to us. Of course it gave us warm memory of those great days of yesteryear when two or three per community per week was the average of demand that we were witnessing. You have the answer?

Joel Rassman

Is roughly 30 communities that we took write-downs with respect to lot options this quarter, there is another 10 or 15 that had residuals more write-downs with respect to lots in some previous quarters but some expenses drilled in.

Stuart Hosansky - Vanguard

Thank you.

Robert Toll

Thank you, you are welcome.

Joel Rassman

We were asked to provide the detail breakdown of land construction progress, percentage of completion sample homes and land deposits, and we will do that as part our last -- as part of our last filing, which should be coming out shortly.

Robert Toll

Thank you, Joel. Rufus.

Operator

And we go next to Steve Fockens with Lehman Brothers.

Steve Fockens - Lehman Brothers

Hey guys. Bob, since I know you have already talked about several markets, but it's also nice in the past you have done a market-by-market grading. I am just wondering, the last time you did this call you basically gave Delver, Texas, DC and Maryland B grades and everything else basically Cs, Ds, and Fs. Has there been any major change by market along those lines since the last time you gave that market-by-market description?

Robert Toll

Let's take a look at, Texas I know I still doing well, Delver --

Steve Fockens - Lehman Brothers

I just want to ask, is it too inconvenient to ask you to go by market-by-market and give a grade?

Robert Toll

I have covered pretty much, Delver is now, I would rate this as a C, if I rated it as a B before, is going in the wrong direction. What were those other ones, you said, Delver, Texas; what were the other markets you mentioned?

Steve Fockens - Lehman Brothers

I think you mentioned the Texas market as B's and DC and --

Robert Toll

They still are.

Steve Fockens - Lehman Brothers

Okay. And -- I think last month you said DC and Maryland were B's.

Joel Rassman

No.

Robert Toll

No.

Joel Rassman

Were D's or Fs.

Robert Toll

No, Maryland would have been B I think and still is, maybe a little better. And DC would have been D or an F, I can't remember, probably a D.

Steve Fockens - Lehman Brothers

And now you call it a B?

Robert Toll

No, I didn’t gave a rating for it. I said it was off the floor a little bit, it's probably a C minus, instead of being at a D.

Steve Fockens - Lehman Brothers

I mean maybe to just quickly summarize, things across the board you are not --

Robert Toll

You may summarize, I may not, but go ahead.

Steve Fockens - Lehman Brothers

It's not as if things are, in a few markets you are seeing things getting a little bit better, but across most of the markets relative two months ago, not a whole lot of change.

Robert Toll

That’s correct.

Steve Fockens - Lehman Brothers

Okay. And then one last question, Joel you said, the inventory next year on the land side may be about 900 million higher than this year?

Joel Rassman

No. I didn't -- as I said that, I miss-spoke. I said I expect that we will based on deals we have in process assuming there is no slippage, we would expect that we will acquire about $900 million worth of land this year on deals that we have put under the contract three, four, five, six years ago that are coming out of the approval process.

Steve Fockens - Lehman Brothers

That's a gross not a net number?

Joel Rassman

That's correct.

Steve Fockens - Lehman Brothers

Okay. So it is possible next year that inventories may not be a whole lot different than today?

Joel Rassman

Possible, I don't have an estimates for balance sheets yet to give you.

Steve Fockens - Lehman Brothers

Okay. Fair enough. Thanks very much.

Robert Toll

You're welcome.

Operator

And we go next to Dan Oppenheim with Banc of America Securities.

Dan Oppenheim - Banc of America Securities

Thanks very much. I was wondering if you could talk about your guidance for the closings of the first quarter of '07, for that increase. Was that due to better luck selling previously cancelled home than you had expected, or is there something else driving that?

Joel Rassman

No, it had to do, but we just got last week a revised settlement sheet of estimates closing for this quarter which are more up to date and include deals which we though we are going to close in the next quarter but have been schedule; it was just a revision of numbers in our normal course.

Dan Oppenheim - Banc of America Securities

Okay, thanks. And can you comment anything on terms of your cancellation rate during the month of November?

Joel Rassman

It's hard --

Robert Toll

Go ahead, I don't know.

Joel Rassman

It's hard in midmonth to get a sense of what the cancellation's rates would be in actual numbers. It doesn't appear as bad as it was last quarter but I can't tell you that that's where we will end up within this quarter.

Dan Oppenheim - Banc of America Securities

Great, thanks very much.

Robert Toll

You're very welcome.

Operator

And we go next to Wayne Cooperman with Cobalt Capital.

Wayne Cooperman - Cobalt Capital

Hey guys, how are you doing?

Robert Toll

Good. Thank you.

Wayne Cooperman - Cobalt Capital

I mean, you guys have been in a lot of markets for a long time. Any chance that you guys just see us sort of stabilizing at this low level and, kind of, stand there for a long time or is that time really what's -- ever happened before?

Robert Toll

We can't say. It hasn’t happened before that it stays there for a long time. Answer is stabilizing, but I -- that's probably definition and you have to define what -- one man's long time is another man's short time. But again, it's hard to reconcile that things would stay down, but this is for Ivy's benefit certainly theoretical. I’m not making a representation. But it's hard to reconcile staying down for a long time with the dynamics of the macroeconomic pictures that exist now. I mean, where we are hot, we see it continuing, which gives us comfort. But again, I’m not making a -- I’m not a prophet, I’m not predicting the future, I don't know. The New York metro market, Hoboken and Jersey City, Brooklyn, Queens, Long Island City, Manhattan, they are roaring for us. There -- as I said last time, they are an oasis. And markets such as Raleigh are still doing very well. So it just -- I don’t see the environment that we saw in the end of '87, '88 and '89 that I see now. It's just a guess.

Joel Rassman

But we will still have demographic trends which seem to indicate demand at significantly higher levels than these --

Robert Toll

Again, that's just theoretical though, as I say.

Wayne Cooperman - Cobalt Capital

But how much -- where do you think -- I think someone asked you before on margins, but where do you think they would stabilize out? I mean, assuming the last couple of years are probably above where they end up.

Robert Toll

I think Joel said 24, 25 is --

Wayne Cooperman - Cobalt Capital

On the gross and then --

Joel Rassman

I looked at the historical stuff in the 1990s and 2000 and it looks like it around 24 to 25 to 26.

Wayne Cooperman - Cobalt Capital

And your SG&A would be approximately 10ish percent, 10 to 11%.

Joel Rassman

I am sorry.

Wayne Cooperman - Cobalt Capital

SG&A about 10.

Joel Rassman

I would think that we would go down below that if we normalize. But at these levels, we are at 11 plus, so --

Wayne Cooperman - Cobalt Capital

Right. Because 10 --

Joel Rassman

Below 10 is not unreasonable.

Wayne Cooperman - Cobalt Capital

Got you. All right, thanks a lot. Hope you guys are right.

Joel Rassman

You are welcome.

Robert Toll

We can't be right or wrong because we have said we don’t know.

Operator

We go next to Ben Segal with Winchester Capital.

Ben Segal - Winchester Capital

Good afternoon.

Robert Toll

Hi, Ben.

Ben Segal - Winchester Capital

Let me get this straight. You said that north Jersey is still very strong for you.

Robert Toll

Actually North Jersey I don’t think we commented on. Unless you are --

Ben Segal - Winchester Capital

Not Hoboken and Jersey City.

Robert Toll

Not Hoboken and Jersey City. New Jersey, one moment. Sorry, we didn’t heard if I gave you all of Jersey, because we don’t separate it. I would rate that market for the last four weeks all but around the Princeton area, I would rate that market as a 'D' for dog. Around the Princeton market, I would rate it as a 'B' for beautiful in this climate.

Ben Segal - Winchester Capital

Can you discuss just in general if you are gaining market share in your markets now and over the next year, so that you see yourself gaining market share.

Robert Toll

It's impossible for us to tell whether we are gaining market share in this market, because we need two sets of information and we only have one. We only know how we are doing. We don’t know how the other guys are doing. I wouldn’t assume that we are doing one or the other. If we are gaining market share, it's so slightest to be imperceptible I would think, because our sales are still nowhere near what they would be on a normalized basis. So I wouldn’t think that we could be gaining much market share.

Ben Segal - Winchester Capital

Do you perceive over the next couple of years that you will be gaining market share?

Robert Toll

I can't perceive it, all I can say is I hope so.

Ben Segal - Winchester Capital

Okay, thank you.

Robert Toll

You are welcome.

Operator

We go next to Susan Berliner with Bear Stearns.

Susan Berliner - Bear Stearns

Hi, good afternoon. One quick housekeeping question, then I had kind of a broad question. If you can just tell me on the lots, what percentage is owned versus option right now?

Robert Toll

What percentage is owned versus option.

Joel Rassman

42 out of the 74,000 lots are up.

Susan Berliner - Bear Stearns

Great. And then I guess --

Robert Toll

[Of course], you have more options than you have owned at this --

Joel Rassman

No, no. 42 are owned out of the 74, so it's more than --

Robert Toll

Not percentages. It's 42,000 lots --

Joel Rassman

Out of the 74,000.

Robert Toll

Out of 74,000 lots, that makes sense.

Joel Rassman

Sure.

Susan Berliner - Bear Stearns

Great. And then --

Robert Toll

Because when you cancel deals, the ones you are cancelling are the ones you don’t own, otherwise you can't cancel.

Susan Berliner - Bear Stearns

And Bob, I don't know if you could comment. If the markets are truly bouncing along the bottom, if you can just update us on your thoughts on M&A in the sector and specifically how you guys would go about gaining market share?

Robert Toll

The latter just by doing what we've been doing, keeping our nose down and working harder. The former, I don’t think it's appropriate for me to comment, one -- it's on the M&A activity that may or may not happen in the industry. It's too speculative for me to comment on. Other than over a [bear], just one on one and that’s just as far as I would go with M&A activity.

Susan Berliner - Bear Stearns

So, the Toll strategy would certainly be organic.

Robert Toll

I am sorry, what would be organic?

Susan Berliner - Bear Stearns

Will Toll strategy clearly be organic or not necessarily?

Robert Toll

Stick to our needing, yes, we are sticking to our needing right now.

Susan Berliner - Bear Stearns

Okay. Thank you.

Robert Toll

Thank you.

Operator

And we go next to Joel Locker with FBN Security.

Joel Locker - FBN Security

Hi guys. Just going back to the non-binding versus binding deposits. How long is it usually the time period in between those before you have to actually sign a binding contract?

Robert Toll

We, depending upon the heat in the community, give anywhere from a week to two weeks.

Joel Locker - FBN Security

So, these two per week in DC, you should know if their binding was in by the end of the year at least all right.

Robert Toll

Yes.

Joel Locker - FBN Security

Right. And I was just wondering on the -- if you are getting any interest from international buyers now that some of the (inaudible), if you are seeing any special on the coast, if you are seeing any foreign money coming in?

Robert Toll

Not enough for me to have noticed other than in the Orlando market, where they appear to rent the homes, because they put a deposit down and then cancel and then we sell the same home again. Hoboken, yes, we have international, we have noted in Hoboken. We should have noted in 110 Third in Manhattan, but I haven’t -- nobody has told me about that, so I -- and I haven’t asked a question. It was frankly squalid.

Joel Locker - FBN Security

Right. And then just the land -- I mean, the inventory on the balance sheet. How much of that land under development, how much of that’s left?

Robert Toll

Joel?

Joel Rassman

We'll be putting out our balance sheet shortly. I don't have all the accurate numbers. We haven't finished our balance sheets by category yet.

Joel Locker - FBN Security

All right. Thanks a lot.

Robert Toll

You're welcome. Joe, any more -- do you have any Internets? No. Good. Rufus?

Operator

And we go next to Darin Fierstein with Wachovia Securities.

Darin Fierstein - Wachovia Securities

Hi. Thanks guys. Just to put this in perspective a little bit. Could you let us know us in DC perhaps the pace of sales, what it is, stabilized versus the peak? And perhaps whether it look like versus the trough, how much thing have changed?

Robert Toll

We have that info, but I haven't got in my hand. The question, Joe, which would come from the [Mike Schneider] analysis of Sunday night's per community per region would be what's normalized per community sales in the DC market. And you can get that, I would imaging, by going back to '02 --

Darin Fierstein - Wachovia Securities

Right.

Robert Toll

And taking a look at the per community sales -- per community non-binding reservation deposits will probably be more accurate.

Darin Fierstein - Wachovia Securities

I am really just trying to get a sense of --

Robert Toll

I know. I am trying to get an answer. I haven't got it at my fingertips, but we do have it. And believe it or not, it is written down and kept track of, because we do follow this stuff. Joel, do you -- can you find --

Joel Rassman

By the next question, we will find it.

Darin Fierstein - Wachovia Securities

Okay.

Joel Rassman

If you show it to me I can find it. This is Rassman. There is '02 -- that's traffic, give me deposits. Here is '02 deposits, it looks like it was running on average. Well, this time of the year would be about one per community in the fourth -- our fiscal fourth quarter ending 10/31. Just eyeballing it looks like it would be 1.35 per community.

Darin Fierstein - Wachovia Securities

Okay. Thank you very much.

Joel Rassman

Rufus?

Operator

And we go next to Michael Rehaut with J.P. Morgan

Michael Rehaut - J.P. Morgan

Hi, thanks. I wasn’t expecting to get back there. Just on -- I guess the follow-up on the margins in the back half of '07, Joel you had said it's kind of building in the specs from the cancellations that you've seen over the last three months. I guess, I was just surprised on that, that you wouldn’t be able to sell those. That those would be -- would it be more higher priority and you wouldn’t try and sell those in the next -- and I guess deliver in the next six months, rather than pushing it out (inaudible) as well.

Robert Toll

Not all of our specs, Michael, are completed units, in fact most of them are not. So, even though they are specs, they are not yet ready for delivery.

Michael Rehaut - J.P. Morgan

Okay. So most of the cancellations you'd say are earlier in the construction process?

Robert Toll

A lot of them are, not most, but lot of them are.

Michael Rehaut - J.P. Morgan

Okay, thank you.

Operator

And we'll take a follow-up question from Ivy Zelman with Credit Suisse.

Ivy Zelman - Credit Suisse

Wow, I didn’t think they would let me back on. Thanks Bob.

Robert Toll

Why not?

Ivy Zelman - Credit Suisse

I don't know. Actually I was thinking about what you said about sales improving, and it's still 5 in Detroit. And I couldn’t help but wonder what kind of margins. When you -- everybody talks about sales, sales are improving and things are getting better. But a lot of the private builders that are seeing the same sales improvement are saying, but I don’t want to upgrade the grade from 'D' in dog or 'F' in Frank, because the margins are just getting whacked significantly in all these units.

Robert Toll

Absolutely the margins are getting whacked in the place like Detroit. I can tell you exactly.

Ivy Zelman - Credit Suisse

Are those possibly the units that you took the write off on.

Robert Toll

As Joel said, I can't tell you. But I can tell you, sort of, wait one moment.

Ivy Zelman - Credit Suisse

Bob, while you are looking, is it possible some of those houses you actually wrote-down the lands, so that you can sell them at a normalized margin and that might be part of why you can sell them at a pretty big discount now.

Robert Toll

That would be into Joel Rassman's --

Joel Rassman

I don’t think that it is quick enough for us to tell you that the write-down had an impact on anything else and we don’t look at it that way. We look at whatever it takes to sell a house in terms of an individual community by looking at the community activity every week and it doesn’t matter whether we wrote it down or didn’t, whatever it sales for is what it sells for.

Ivy Zelman - Credit Suisse

But in general, I mean, when you are looking at the margins that you are now selling where you are seeing the improvement. I guess the think that I would believe is --

Robert Toll

Now you are asking us to shift gears and take a look at Washington, Ivy.

Ivy Zelman - Credit Suisse

No, I don’t need you to look at Washington. I just want you to --

Robert Toll

We saw pretty good margins, as a matter of fact very good margins there. But in Michigan, to answer your question, your supposition was correct. Our margins are zilch in the Michigan market.

Ivy Zelman - Credit Suisse

I guess, I am just wondering about wouldn’t -- rather than just looking at sales take, wouldn’t it be more an inflection point that you are getting better when margin stabilize and are you seeing any market where you are selling houses today where margins you can say are stabilizing?

Robert Toll

Yes, yes.

Ivy Zelman - Credit Suisse

Okay. And where would those markets be?

Robert Toll

Washington DC, I said to you just a little while ago.

Ivy Zelman - Credit Suisse

The margins you don’t think can go lower even though --

Robert Toll

No, Ivy, with respect to me predicting the future, when you say I don’t think margins can go lower, I don’t --

Ivy Zelman - Credit Suisse

Okay. Well --

Robert Toll

I don't have crystal ball.

Ivy Zelman - Credit Suisse

Beyond you also commented quite a bit on other market showing some improvement.

Robert Toll

Yes.

Ivy Zelman - Credit Suisse

Is there any other markets that you have seen stabilization in margins besides metro DC.

Robert Toll

Yes, I am sure.

Ivy Zelman - Credit Suisse

Can you tell us some of those please?

Robert Toll

I have got to take two tables out and run down margins against sales, and I haven't got that. Joel?

Joel Rassman

I mean, just as an example, we have slow margins in Hoboken area, the New York City area --

Robert Toll

Texas is doing well. Raleigh.

Joel Rassman

Texas.

Ivy Zelman - Credit Suisse

Okay, let me try it better this way. In the markets where we all know that the inventories and the excesses were the greatest. The market that were the greatest are now on the downward spiral, not the Texas and Raleighs of the world. Besides metro DC are there any market that you can say the margins are stabilizing, because pricing is no longer under pressure and incentives are not significant.

Robert Toll

Yeah, Maryland.

Ivy Zelman - Credit Suisse

Okay. Is there -- is it Vegas, Phoenix, California, Florida, some of those markets?

Robert Toll

Phoenix, if you recall, I said was going down for us.

Ivy Zelman - Credit Suisse

Okay.

Robert Toll

California, we haven't lowered the price and did a little more business I said in Northern California, which was seen as in San Francisco markets. We haven't lowered the margins there. Northern California still has some pretty significant margins. No, that just maybe our stubbornness too. Thank you, Ivy.

Ivy Zelman - Credit Suisse

Okay. Thanks, Bob.

Robert Toll

Welcome.

Operator

Also with a follow-up question, we will return to Timothy Jones with Wasserman & Associates.

Timothy Jones - Wasserman & Associates

I am so close to being the old Tim Jones, 100 miles an hour fast [that was amazing], but I am not going to do it. But let me ask you a couple of questions. Okay. The one thing that is really interesting, not only is that you are the only builder that I know of, that said they are going to buy more land next year than they did this year. Obviously that is because of the long lead time. Would you like to give me more color on that?

Robert Toll

Yes, sure, Tim. I think we're going to buy land next year, because if the markets still -- it still stinks, we’re going to have pretty great opportunity. And if the market doesn’t stink, then we better get ourselves back in gearing our ordinary business. Right now, our thresholds are higher for purchase, but we see that opportunity. Next year you would assume that if things return to more normalized conditions and more normalized buying, and every other builder will be out there buying as well.

Timothy Jones - Wasserman & Associates

That was fairly vanilla. Can I get a little bit more color on it?

Robert Toll

No, I am sorry, I don’t have more than --

Timothy Jones - Wasserman & Associates

Well, let me ask you.

Robert Toll

Go ahead.

Timothy Jones - Wasserman & Associates

Let's go into the markets itself. Are these markets really the markets you had locked up in up in the northeast, which had a five, seven year timeframe to get unlocked? Are you buying land in markets like Florida or some of these other ones as California. Could you give me some color on that Bobby?

Robert Toll

Yes, we looked at a deal last night in California --

Joel Rassman

Land that I am currently going to buy in the current year titled to.

Robert Toll

I am sorry.

Joel Rassman

Titled to are generally deals we put under contract three, four, five years ago.

Robert Toll

Is that what you are asking, Tim?

Timothy Jones - Wasserman & Associates

Yes. But I mean is there certain markets -- I mean is it all looked up -- is it all locked up and that is stuff that you brought up four to five years ago? I mean, I think you probably saying yes. Because you are the only that’s going to increase the land holding, of any builder I know, not below 20.

Robert Toll

What can I say?

Timothy Jones - Wasserman & Associates

No, is that correct? Is that a correct assumption as you locked most of that land about four or five years ago?

Joel Rassman

Some was three years ago, some is fours years ago, some is five years.

Robert Toll

No, I think you are right, Tim. Land that we're taking down is land that we locked up probably four, five years ago.

Timothy Jones - Wasserman & Associates

Okay, that’s fine. Thank you for the answer.

Robert Toll

Okay. Thanks Tim. Rufus, we got to run. We got some other things we got to do.

Joel Rassman

If there are questions, let them email them and then we will try to get back.

Robert Toll

Yes. Rufus?

Operator

Yes, sir.

Robert Toll

If there are other questions still hanging out there, obviously they have been waiting a good long time and I would like to get to them. If they will email them to me, we will get back to those questioners, okay?

Operator

Thank you, sir.

Robert Toll

All right. So, thank you all very much. I appreciate your participation in this call. I will look forward to speaking to you in the future. Have a great one. Bye, bye. Thank you, Rufus.

Operator

You are welcome. Thank you, sir. And ladies and gentlemen, this does conclude the Toll Brothers fourth quarter 2006 earnings release conference call. We do appreciate your participation and you may disconnect at this time.

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